Issues for Discussion

Standard conditions of contract Vs. the civil code

On unforeseen circumstance
Article 3286, articles 3183-3189,
clause 65, 20(2) of GCC,
On Theory of fait du prince (Act of Government)
Art.1793-1794 Vs Arti.3190-3193
Clause 70 (1), 70(4)
 Liquidated Damages
 Regulating the potential damages that employer may suffer,
as the consequence of the contractor’s failure to perform its
contractual obligations, is the order of the day in the
construction industry.
 The amount of liquidated damages is determined by the
employer, before tenders are invited
 It is a reasonable assessment of the actual damages which he
would suffer in the event of delay in completion of the works
 The contracting parties address this by incorporating a ‘the
Liquidated Damages Clause’ to that effect
 In the form of a specific number of currency or as a
percentage of the contract price per day or per week
 History of LD
• It is believed that the Liquidated Damages Doctrine is
used widely in Common Law Countries.
• Generally, at common law, a liquidated damages
clause will not be enforced if its purpose is to punish
the wrongdoer/party in breach rather than to
compensate the injured party
• In order for a liquidated damages clause to be
upheld, two conditions must be met.
– First, the amount of the damages identified must roughly
approximate the damages likely to fall upon the party
seeking the benefit of the term.
– Second, the damages must be sufficiently uncertain at the
time the contract is made that such a clause will likely save
both parties the future difficulty of estimating damages.
• Liquidated damages are not penalties, they are pre-
determined damages set at the time that a contract is
entered into, based on a calculation of the actual loss the
client is likely to incur if the contractor fails to meet the
completion date.
• As liquidated damages are not a penalty, they must have
been based on a genuine calculation of damages when they
were set.
• If they are not genuine, they may be considered a penalty by
the courts and so will be unenforceable (see Dunlop
Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd).
• Under these circumstances, the client would still be able to
pursue a claim for breach of contract.
• There are few businesses for which the saying "time is
money" is more appropriate than the construction
industry.
• Timing is typically highly sensitive in the context
of construction contracting.
• Owners lose opportunity and profits waiting for
completion of late projects.
• Similarly, when projects are late to complete,
contractors carry the financial burden of maintaining
field and office personnel beyond dates anticipated at
the time the project was priced.
 How LD is understood Today?

• Nowadays, however, the Doctrine has received a

welcoming arm in the construction contracts including in
the Civil Law Countries.
• In Ethiopia, for example, it is now fully being put in use
in all government construction contracts.
• The Doctrine might have made its entry into the
Ethiopian Construction Laws via the FIDIC (Red Book)
Form.
• But, it does not mean that the Civil Law Countries do not
have a counterpart doctrine.
• It is governed by the Penalty Clause.
 Penalty Clause Vs. LD
• LD- …
– a sum fixed up in advance, which is a fair and genuine pre-
estimate of the probable loss that is likely to result from
the breach.
– it is the intention of the parties that it shall represent the
loss sustained and it does actually approximately
represent such loss
• PC-…
– a sum fixed up in advance, which is extravagant and
unconscionable in amount in comparison with the greatest
loss that could conceivably be proved to have followed
from the breach.
– The intention of the parties is that the sum so fixed shall
be paid, not in lieu of performance, but to secure
performance, the sum is called a penalty.
 Is it possible to claim both?

• Common Law-Policy reason obliges the rejection of PC

• Even, If liquidated damages are not considered to be a
genuine pre-estimate of the loss which would be
suffered by the employer, they run the risk of being
struck out as constituting a ‘penalty’ for breach of
contract, which is contrary to English public policy.”
• Therefore, it is important that the sum fixed for
liquidated damages accurately reflect the extent of loss
the employer will suffer if there is a delay in the
performance of the contract
•
 How it is Understood in Ethiopia?

• In Ethiopia, penalty clause is regulated under the

Civil Code Articles 1889-1894
• There is no rule, directly or indirectly, regulating the
doctrine of liquidated damages clauses.
• Recent developments in Ethiopia, however, witness
that in all major Government Construction Contracts,
the liquidated damages clause is incorporated.
• Therefore, the doctrine is particularly relevant and
merits due attention.
• This is due to the ff reasons;
– Firstly, the applicability of the FIDIC Red Book (1987) in the
major international construction contracts in Ethiopia is
evident, if not, inevitable.
– Secondly, through the MoWUD Standard Conditions of
Contract for the Construction of Civil Work Projects (May
1994, all Government Construction Contracts, include the
liquidated damages clause.
 Issues in Relation to LD

• How should we treat it?

• Should we treat it in the way that it is treated in the
Common Law Countries?
• Should the Ethiopian Courts let the parties use them
interchangeably?
• If the parties provide exaggerated amount, should
the courts nullify a liquidated damages clause
• Is it contrary to Ethiopian public policy?
• Article 1889 cum 1892, penalty clauses are not
consistent with the idea of applying the liquidated
damages
• Art. 1889. — Penalty.
– The parties may fix the amount of damages which will
be due, should a party fail to discharge his obligations or
to discharge them completely and in due time.
• Art. 1892. — Actual damage.
– (l) The penalty shall be due notwithstanding that no
actual damage was caused to the creditor.
– (2) Damages may not be claimed above the amount of
the penalty unless non-performance is due to the debtor's
intention to cause damage or to his gross negligence or
grave fault.
• It is possible to conclude that;
– PC is not supposed to be ‘genuine pre-estimates of a
potential loss’
• Creditor can claim above and more than the amount
that is fixed in the PC when and if the creditor can
show that non-performance was due to:
– the debtor’s intention to cause damage or
– the debtor’s gross negligence, or
– the debtor’s grave fault.
• How LD is treated in
– The standard condition of contract? Clause 47
– PPA directive? Article 16.27.4
 Assignment and Sub-contracting

• Assignment
– Widely used in all the legal systems
– Regulated by the Civil Code Articles 1962-1985
– Construction contracts are provided under the
Civil Code Articles 3201-3205, and 3293-3296
– Standard Condition of contract
• Sub-contracting-why contractors sub contract
– Non-wage costs of employment such as training, pension
rights, redundancy payments and sick pay;
– The increasingly diverse skill base required for the growth
in complexity;
– The rising expectations of workers and a concomitant shift
to freelancing;
– The choice every firm faces between diversifying and
contracting out;
– The perceived threat posed by trade unionization of
permanently employed labor;
– Off-setting the risks associated with responsibility by
transferring them; and
• Sub-contracting has been given of recognition in the
construction industry in Ethiopia under the Civil Code
of Ethiopia of 1960. Art. 3201(2) provides thus:
– A sub-contract is a contract whereby the party having
contracted with the administrative authorities substitutes
a third party for himself for the performance by the latter
of a part only or of an item of the contract
• .What then is meant by ‘authorization’ or ‘approval’
and how is it executed?
• Art.7 of Federal Standard Bidding Document for the
procurement of works provides thus:
– The Contractor may sub-contract with the approval of the
engineer, but may not assign the contract without the
approval of the employer in writing. Sub-contracting shall
not alter the contractor’s obligations Issued by the PPA
• MoWUD Standard Conditions of Contract, under
Article 4
• Both provide that the Engineer, the agent of the
employer, is the person who can give the approval
without the need to refer it to the Employer
 Acceptance of the Works

• Once the contractor has substantially performed his

contractual obligations in constructing the project,
the employer will be ready to accept the work
• Today it is not uncommon to witness that
construction projects are poorly carried out
• What legal rights are, then, the employer is entitled
in case of such kind of performance?
• Art. 3274. — Provisional acceptance.
– What is the effect?
• During PA, the employer examines the work whether or not it
conforms to the contractual agreement
• Defects can be classified as “Latent” and “Patent” defects.
• Employer is duty-bound to examine and communicate
“Patent” defects to the contractor within a year,
• “Latent” defects can still be remedied by the contractor any
time they appear, if reported without delay, within 10 years
( refered as ‘Decennial “Liability” Period’)
• 3279 of the Civil Code
• Art. 3282. — Warranty in respect of defects of construction
• (1) Unless otherwise provided, the contractor shall be liable to
the administrative authorities for the defects of construction of
the works during ten years from the day on which they have
entered into possession of the works.
• (2) The warranty shall not he due, however, in respect of the
defects which were apparent at the time of the final
acceptance of the works.
• (3) The warranty shall apply to such defects only as prevent the
works from being used for the purpose mentioned in the
contract or as render such use more onerous or less profitable.
• Art. 3039, — Warranty due by contractor.
– (1) The contractor shall guarantee during ten years from
its delivery the proper execution and the solidity of the
work done by him.
– (2) He shall be liable during this period for such loss or
deterioration of the work as is due to a defect in its
execution or to the nature of the soil on which the work
has been done.
– (3) Any provision shortening the period laid down in sub-
art. (1) or excluding the warranty due by the contractor
shall be of no effect.
 Guarantees in Construction Contracts

• The first step in business is to know your business

partner thoroughly
• Businessmen have always wanted to remain guarded
against non-performance risks
• In government construction contracts, the
government department (employer) is always
considered solvent
• At any rate, the contractor may have to fall back to
the legal mortgage under Art.3067 of the Civil Code
on Mortgages.
• In the construction industry, therefore, there are a
number of security devises that are used to attain
this objective;
– Bid Bonds; Article 36 of the Federal Public
Procurement Proclamation
– Performance Bonds; Article 43 of the Federal
Public Procurement Proclamation , Art.11.14 of
the Federal Public Procurement directives
– Advance Payment Guarantees;
– Retention Money Bonds, and
– Maintenance or Defects Liability Bonds,